ACQUISITIONS AND DIVESTITURES

The Company accounts for business acquisitions in accordance with the acquisition method of accounting as prescribed by FASB ASC Topic 805, Business Combinations. The acquisition method of accounting requires the Company to record the net assets and liabilities acquired based on their estimated fair values as of the acquisition date, with any excess of the consideration transferred over the estimated fair value of the net assets acquired, including identifiable intangible assets, to be recorded to goodwill. Under the acquisition method, the operating results of acquired companies are included in the Company's consolidated financial statements beginning on the date of acquisition.

The Company recognized $107.2 million, $158.5 million and $42.6 million of acquisition and integration charges in 2018, 2017 and 2016, respectively. Acquisition and integration charges reflect additional costs and expenses resulting from our acquisitions and include, among other items, professional fees, severance, stock-based compensation charges and accruals for exit costs for certain acquisition-related office space in Arlington, Virginia that the Company does not intend to occupy. During 2018, exit costs represented the single largest component of our acquisition and integration charges.

The table below presents a summary of the activity related to our accrual for exit costs at all of our facilities for the years ended December 31, 2018 and 2017 (in thousands). There was no such activity in 2016.



	2018			2017
Liability balance at beginning of the period	$	12,961		$	—
Charges and adjustments, net (1)	69,790			13,087
Payments, net of $2,515 in sublease rent during 2018	(26,087		)	(126		)
Liability balance at end of the period (2)	$	56,664		$	12,961


(1)	During 2018, the Company recognized $7.5 million of expense for changes in the original estimates of its exit cost obligations. The corresponding amount for 2017 was a benefit of $10.1 million.


(2)	In total, we estimate that the Company will make net cash payments of approximately $90.6 million for exit costs in connection with the activities described herein. Through December 31, 2018, in the aggregate, we have expensed $82.9 million and had net cash outlays of $26.2 million related to such activities.

Acquisitions

The Company did not have any business acquisitions in 2018.

2017

CEB

On April 5, 2017, the Company acquired 100% of the outstanding capital stock of CEB for an aggregate purchase price of $3.5 billion. The consideration transferred by Gartner included approximately $2.7 billion in cash and $818.7 million in fair value of Gartner common shares. CEB was a publicly-held company headquartered in Arlington, Virginia with approximately 4,900 employees. CEB's primary business was to serve as a leading provider of subscription-based, best practice research and analysis focusing on human resources, sales, finance, IT, and legal. CEB served executives and professionals at corporate and middle market institutions in over 70 countries.

On March 9, 2017, the Company acquired 100% of the outstanding capital stock of L2, a privately-held firm based in New York City with 150 employees, for an aggregate purchase price of $134.2 million. L2 is a subscription-based research business that benchmarks the digital performance of brands.

Total consideration transferred

The following table summarizes the aggregate consideration paid for these acquisitions during 2017 (in thousands):



Aggregate consideration (1):	CEB		L2		Total
Cash paid at close (2), (3)	$	2,687,704	$	134,199	$	2,821,903
Additional cash paid (2)	12,465		—		12,465
Fair value of Gartner equity (4)	818,660		—		818,660
Total	$	3,518,829	$	134,199	$	3,653,028


(1)	Includes the total consideration transferred for 100% of the outstanding capital stock of the acquired businesses.


(2)	The cash paid at close represents the gross contractual amount paid. The Company paid the additional $12.5 million in cash in third quarter 2017. Net of cash acquired and for cash flow reporting purposes, the Company paid a total of approximately $2.64 billion in cash for acquisitions in 2017.


(3)	The Company borrowed a total of approximately $2.8 billion in conjunction with the CEB acquisition (see Note 5 — Debt for additional information).


(4)	Consists of the fair value of (i) Gartner common stock issued (see Note 7 — Stockholders' Equity for additional information) and (ii) stock-based compensation replacement awards.

Allocation of Purchase Price

The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed for the acquisitions of L2 and CEB (in thousands):



	CEB (3)		L2 (4)		Total
Assets:
Cash	$	194,706	$	4,852	$	199,558
Fees receivable	175,440		8,277		183,717
Prepaid expenses and other current assets	53,610		1,167		54,777
Property, equipment and leasehold improvements	51,399		663		52,062
Goodwill (1)	2,349,589		108,202		2,457,791
Finite-lived intangible assets (2)	1,584,300		15,890		1,600,190
Other assets	66,818		13,067		79,885
Total assets	4,475,862		152,118		4,627,980
Liabilities:
Accounts payable and accrued liabilities	142,134		3,050		145,184
Deferred revenues (current)	246,472		13,200		259,672
Other liabilities	568,427		1,669		570,096
Total liabilities	957,033		17,919		974,952
Net assets acquired	$	3,518,829	$	134,199	$	3,653,028

(1)

The Company believes the goodwill resulting from the acquisitions is supportable based on anticipated synergies. For CEB, among the factors contributing to the anticipated synergies are a broader market presence, expanded product offerings and market opportunities, and an acceleration of CEB's growth by leveraging Gartner's global infrastructure and best practices in sales productivity and other areas. None of the recorded goodwill is expected to be deductible for tax purposes.

(2)

All of the acquired intangible assets are finite-lived. The determination of the fair value of the finite-lived intangible assets required management judgment and the consideration of a number of factors. In determining the fair values, management primarily relied on income valuation methodologies, in particular discounted cash flow models. The use of discounted cash flow models required the use of estimates, significant among them projected cash flows related to the particular asset; the useful lives of the particular assets; the selection of royalty and discount rates used in the models; and certain published industry benchmark data. In establishing the estimated useful lives of the finite-lived intangible assets, the Company relied on both internally-generated data for similar assets as well as certain published industry benchmark data. We believe the values we have assigned to the finite-lived intangible assets are both reasonable and supportable.

(3)

The Company's financial statements include the operating results of CEB beginning on April 5, 2017, the date of acquisition. CEB's operating results and the related goodwill are being reported as part of the Company's Research, Conferences and Other segments. Had the Company acquired CEB in prior periods, the impact to the Company's operating results would have been material, and as a result the following pro forma consolidated financial information is presented as if CEB had been acquired by the Company on January 1, 2016 (in thousands, except per share amounts):



	Twelve Months Ended
	December 31,
	2017		2016
Pro forma total revenue	$	3,726,470	$	3,183,070
Pro forma net income (loss)	150,167		(241,423		)
Pro forma basic and diluted income (loss) per share	$	1.66	$	(2.68	)

The pro forma results have been prepared in accordance with U.S. GAAP and include the following pro forma adjustments:

(a) An increase in interest expense and amortization of debt issuance costs related to the financing of the CEB acquisition. Note 5 — Debt provides further information regarding the Company's borrowings related to the CEB acquisition.

(b) A change in revenue as a result of the required fair value adjustment to deferred revenue.

(c) An adjustment for additional depreciation and amortization expense as a result of the purchase price allocation for finite-lived intangible assets and property, equipment, and leasehold improvements.

(4)

The Company's financial statements include the operating results of L2 beginning on March 9, 2017, the acquisition date. L2's operating results were not material to the Company's consolidated operating and segment results for 2017. Had the Company acquired L2 in prior periods, the impact to the Company's operating results would not have been material, and as a result pro forma financial information for L2 for prior periods has not been presented. L2's operating results and the related goodwill are being reported as part of the Company's Research segment.

2016

On November 9, 2016, the Company acquired 100% of the outstanding capital stock of Machina Research Limited ("Machina"), a privately-held firm based in London with 16 employees. The Company paid approximately $4.5 million in cash at close. Machina provides clients with subscription-based research that provides strategic insight and market intelligence in areas such as IOT ("internet of things").

On June 28, 2016, the Company acquired 100% of the outstanding capital stock of Newco 5CL Limited (which operates under the trade name "SCM World"), a privately-held firm based in London with 60 employees, for $34.2 million in cash paid at close. SCM World is a leading cross-industry peer network and learning community providing subscription-based research and conferences for supply chain executives. Net of cash acquired with the business and for cash flow reporting purposes, the Company paid approximately $27.9 million in cash for SCM World. The acquisition of SCM World also included an earn-out provision. The fair value of the earn-out was recorded on the acquisition date as part of the cost of the acquisition and was subsequently adjusted with a charge against earnings.

The Company recorded $32.4 million of goodwill and $5.9 million of amortizable intangible assets for these two acquisitions and an immaterial amount of other assets on a net basis. The operating results and the related goodwill are reported as part of the Company's Research and Conferences segments. The Company also recorded an additional $1.9 million of additional goodwill in 2016 related to a prior year acquisition.

Divestitures

During 2018, the Company completed the divestiture of all three of the non-core businesses comprising its Other segment, all of which were acquired in the CEB acquisition in April 2017. These three businesses contributed approximately $97.3 million of revenue and $60.5 million of gross contribution in 2018. The Company used the cash proceeds from these divestitures to pay down outstanding debt.

Additional information regarding the Other segment divestitures is provided below:

CEB Challenger training business

On August 31, 2018, the Company sold its CEB Challenger training business for $119.1 million and realized approximately $116.0 million in cash, which is net of working capital adjustments and certain closing costs. The Company recorded a pretax gain on the sale of approximately $8.3 million.

CEB Workforce Survey and Analytics business

On May 1, 2018, the Company sold its CEB Workforce Survey and Analytics business for $28.0 million and realized approximately $26.4 million in cash, which is net of certain closing expenses. The Company recorded a pretax gain on the sale of approximately $8.8 million.

CEB Talent Assessment business

On April 3, 2018, the Company sold its CEB Talent Assessment business for $403.0 million and realized approximately $375.8 million in cash from the sale, which is net of cash transferred with the business and certain closing expenses. The Company recorded a pretax gain of approximately $15.5 million on the sale.

Other asset sales

During 2018, the Company also received $8.6 million in cash proceeds as well as other consideration and recorded a net pretax gain of approximately $12.8 million from the sale of certain non-core assets acquired in the CEB transaction. This includes the October 31, 2018 sale of a small Research segment product called Metrics That Matter.